CTA Case No. 4879 (Decision)

REPUBLIC OF TUE PUILIPPINES COURT OF TAX APPEALS QUEZON CITY LIDO EXPORT, INC., Petitioner, - vers\&S - C.T.A. NO. 4879 COMMISSIONER OF INTERNAL Proaulgated: , REVENUE, APR 241995~ Respondent. H- - - - - --------------- H DEC:IS:ION This is an assessaent case aaounting to a total of P3,01G,788.23 representing alleged deficiency withholding taHes for taMable year 1987. Petitioner, a corporation organized and eHisting under the laws of the Republic of the Philippines, is engaged in the aanufacture and eHport of table linens and other tabletop accessories. On June 7, 1990, Petitioner received froa Respondent a deaand letter accoapanied by assessaent notice nuabers FAS-1-87-90-002278, FAS-1-87-90-002279, and FAS-l-87-90- 002280, the of "P3,0lG,788.23 representing deficiency withholding taMes, including increaents thereon, details of which are shown hereunder: 697

DECISION - C.T.A. No. 4879 - 2- Deficiency Final Withholding TaM <Non-Resident Stockholders) January to June.1987 Accrued A�ount per Audited Financial State�ent <�250,000) P5,112,500.00 Withholding taM due thereon (30~) .................. P1,.533, 750.00 LESS: A�ount withheld Deficiency Withholding TaM P1,533,750.00 ADD: 25~ surcharge J83,1t37.50 20~ int. fr. 07-21-87 to 05-11-90 l,075,41t6.J2 Co�pro�ise 15,000.00 TOTAL AMOUNT DUE AND COLLECTIBLE P3,007,633.82 Deficiency Final Withholdoing TaK <Cash Dividends) January to June, 1987 A�ount subject to tax � � � � � � � � � � � � � � � � � � -.P_--::.1.-.4,,._4...,3?=�-..7-=6 Withholding taM due thereon (10~) .................. � . � . � � . � � � � . � � � � � � p 1,1tlt3.27 LESS: A�ount paid Deficiency Withholding TaM � � � � � � � � � � � � � � � � � � p 1,443.27 ADD: 25~ surcharge 358.32 20~ int. fr. 07-21-87 to 05-11-90 l, 010.60 Co�pro�ise . � �. . . .���� �. . . .�� 100.00 TOTAL AMOUNT DUE AND COLLECTIBLE � � � � � � � � � � � � � � � � � � =p===2!:,7==4=2=�=5=9 Deficiency EKpanded Withholding TaK January to June, 1987 Withh"~dipg taxes due (various> ����������������� p 11,247.76 "-ESSt~P~r�f.Jlt per return . ��.. �.�. ���. ��.. p 8.099.81 D.fic~eri~~��Mpanded W~thholding taK 3,11t7.95 ADD: 25~ surcharge 786.98 ................. 20~ int. fr. 07-21-87 to 05-ll-90 2,207.29 lQQ,OQ Co�pro��i se TOTAL AMOUNT DUE AND COLLECTIBLE ����������������� p====6!:,2=1t=2=�=2=2= <EKh.4, BIR Record p. 237) 698

DECISION - C.T.A. No. 4879 - 3- From the records of the Respondent, "it appears that herein taxpayer stands assessed and required to pay various deficiency taxes na�ely: 1. Deficiency final withholding tax on income pay�ents paid to non-resident aliens not doing business in the Philippines in the a�ount of P3,007,633.82 with incre�ents; 2. Deficiency final withholding tax on dividend pay�ents to for�er stockholders in the amount of P2,912.19, likewise with incre�ents, and 3. Deficiency expanded withholding tax on compensation in the amount of P6,242.22 <settled by actual pay�ent>." <Memorandum Report, BIR Records p. 75> "As early as Nove�ber 21, 1987, Petitioner paid the deficiency expanded withholding tax assessment <BIR P.O. No. 6537793 and CB C.R. No. 18451366> leaving the first two assessments as subject �atter of Petitioner's protest which was filed with the Respondent on June 29, 1990��� <Letter of Protest, BIR Records, p. 256>. In the said protest letter, Petitioner argued that the above assessments "have no factual and legal bases to stand on" since "the accrual of the liability to the for�er �ajor stockholders of our co�pany for their agree�ents not <to) compete in the linen business in the U.S. and other parts of the world is income fro� sources outside the Philippines and, therefore, not st.tbject to 699-

DECISION - C.T.A. No. 4879 - 4- the Philippine withholding tax" (ibid.>. "x x Moreover, the obligation to withhold arises only at the time of payment, not at the ti�e of accrual. As of the fiscal year ended Jt..me 30, 1987, the payment fol~ the agreement not to co�pete was not yet �ade as it is payable not i ea.~l el~ than Mal~ch 31' 1988". (ibid). With regal~d to deficiency final withholding tax of P2, 912. 19, Petitioner averred that "this item actually represents interest former stockholders. These advances were covered by promissory notes which provide for interest payments at competitive rates and with definite �aturity period. We submit the fact that the interest was paid to a for�er stockholders does not �ean that it is cash dividend. It is possible for a stockholder to �ake a valid loan and the interest is treated as such." (ibid.> The Respondent, however, alleged that the introduction by the Petitioner of "a 'rescission document' where suddenly a sister company assu�ed and paid the liability - thus claiming it to be an income from outside the Philippines" <Memorandum Report, BIR Records, P� 275> " ��� was however considered by the undersigned revenue officers as a sham, fictitious and of no legal status whatsoever. It has been considered as a 700

DECISION - C.T.A. No. 4879 - 5- ploy, an unreasonable sche�e to waylay the Philippine Govern�ent of the right to collect a valid tax. As it was aptly said in a case, "where the corporate for� or organization is adopted or a corporate entity is asserted in an endeavor to evade a statute or to �odify its intent, courts� will disregard the corporation or its entity. This has been applied to violations of tax laws" <Fletcher, 170-171, Co��entaries & Jurisprudence on the Co��ercial Laws of the Philippines by Agbayani, Vol. 111, 1970 ed. p. 121>. 1t was further held, that "where a f corporation is a du��y, so unreal or a sham and serves no business purposes and is intended only as blind, like the sister company cited by the herein taxpayer which identity was not made known, the corporate form maybe ignored for the law cannot countenance a for� that is bald and a �ischievous fiction." <Leddel and Co. vs. Co��issioner of Internal Revenue, L-9687, June 30, 19Gl, cited under RAMO No. 1-BG>" (ibid p. 274> Moreover, the above Revenue Examiners averred that: "1t is a well settled regulation on withholding of tax that three requisites must concur in order that withholding shall take place, and these are: � 1. the income must be fixed or deter�inable annual or periodical; 2. the income �ust be sources within the Philippines; and 701

DECISION - C.T.A. No. 4879 - 6- 3. the inco�e �ust be paid to non- resident alien individual not engaged in tt~ade or business in the Philippines and not having an office or place of business therein. <R.P. vs. Jose Razon and Jai-alai Corp.; CTA Case No. #155&&, Jan. 23-57> All these requisites are indeed present in the instant case, and for that �atter, Lido Export Inc. is well confirmed as a withholding agent herein. Corollarily, it was held in a case, that "withholding agent is constituted as the ~gent of both the govern�ent and the taxpayer. With respect to the collection and/or withholding of the tan, he is the Government agent. In regard to the filing of the necessary income tax return and .the pay�ent of the tan to the Govern�ent, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary Government agent especially because under Section 53 (c) he is held personally liable for the tan he is duty bound to withhold, whereas, the Co��issioner of Internal Revenue and his deputies are not �ade liable by law." (Phil. Suaranty Co. vs. Co��issioner of Internal Revenue, 13 SCRA, 775, NIRC by Jose Aranas, p. 247>. <Me�orandu� Report, BIR Records p. 274-273> Thus, on Nove�ber 10, 1992, Petitioner received a letter from the Respondent finally denying its protest. <Enh. 5, BIR Records, p. 293>. Hence, this appeal. The issues presented in this case are the following: 1. Whether or not Petitioner is 1i able to withhold the 30~ tan of the amount of $250,000.00 �ade payable to the Cro�wells by reason of and pm~suant t 0 the non-competition agreement entered into between the latter and the Petitioner; and 702

DECISION - C.T.R. No. 4879 - 7- 2. Whethel~ or not Petit i onel~ is liable to pay deficiency final withholding t.:uc on dividend pay�ents. We answer the first issue in the affirmative. Petitioner, in its Memorandum insisted that it is not liable to withhold the taM "since no pay�ent was actually effected and the Cromwells did not receive any income" <CT~ Records, p. 229> and "that the $250,000.00 was actually paid by W/C l�ports lnc. and the Petitioner never reimbursed the former ��� "<ibid., p. 230>. "The Cromwells never received or Petitioner because the Non-co�petition ~gree�ents were rescinded" (ibid., p. 229). This line of argu�ent <that the Non-competition agreements were rescinded) as noted by this Court, was never used by the Petitioner in its protest letter in the ad111inistrative level. <see Protest Letter, BlR Records, p. 25&> ln fact, the BlR exa�iners were surprised when the Petitioner "introduced a 'rescission document' where suddenlY a sister co11pany assumed and paid the liability - thus claiming it to be an income outside the Philippines" <Underscoring supplied; BIR Records, p. 274>. Deliberately or not, never in the Petition for Review or in the Memorandum did the Petitioner mention that W.C. Imports, Inc., is its sister co11pany. It was only during the presentation of the Petitioner's witness, Mr. Patrick J. McCullagh, that 703

DECISION - C.T.A. No. 4879 - 8- this Court found out that W. C. l�ports, lnc., and Lido Export, lnc., are closely related to each other, if not, one and the saMe. Said, he: DIRECT EXAMINATION BY ATTY. BANJQUED Q. Mr. Witness, you said that you are the business Manager of W. C. I �port s, is that correct? A. That is correct. <T.S.N. June 28, 1993 Hearing, p. 6> XXX XXX Q. What other entities if any are you presently connected with Mr. Witness other than W. C. 1 � port s? A. 1 a� President and Director of Ashling Corporation, a California based U.S. corporation, which is the too� owner of W.C, IMports and I a� also director of Metonic lnvest�ents, Ltd. and Director of Lido Export, Inc. Philiooine InvestMent. <Underscoring supplied; ibid., p. 7> XXX X X )C )C )C X Q. 1 a� showing you Mr. Witness, these two separate docu�ents entitled me�orandum of understanding regarding non-co�petition agreements and.related agree�ents which earlier had been identified and �arked as Exhibits G and H for the Petitioner. Are these the memorandu� of understanding that you were referring to earlier? A. Yes , sir. Q. There are signatures appearing at the end of these agreements, do you recognize these s i gnat m~es? A. Yes, sir. 704

DECISION - C.T.A. No. 4879 - 9- Q. Whose signatures are those? A. On Exhibit G, the signature on G-1 is �Y signature, G-2 is �v signature as President of W.C. I�ports, G-3 is �v signatur'e as director of Metonic and G-4 is �v signature as President of Lido Exoort, Inc. and the sa�e applies to Exhibit H-1, H-2, H-3, H-4 <Underscoring supplied; ibid., pp. 18-19> Fro� the foregoing testi�ony, it can be safely deduced that Petitioner is indeed one and the sa�e with W.C. IMports or at the very least closely related to each other. And for tax purposes, the separate corporate entity May be disregarded "where it serves but as a shield for tax evasion." Internal Revenue vs. Norton & Harrison Co�pany, August 31, 1964, SCRA 715> And in the case of Liddell & Co., Inc. VS. Collector of Internal Revenue L-9687, Jlme 30, 1961, it was held thus: There are quite a series of conspicuous circumstances that �ilitates against the separate and distinct personality of Liddell Motors Inc., fro� Liddell & Co. We notice that the bulk of the business of Liddell & Co. was channelled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. purslted no activities except to secure cars, trucks, and spare parts fro� Liddell & Co., Inc. and then sell the� to the general public. These sales of vehicles by Liddell & Co., to Liddell Motors Inc. for the �ost part were shown to have taken place on the sa�e day that Liddell Motors, Inc. sold such vehicles to the public. We �ay even say that the cars and trucks �erely touched the hands of Liddell Motors, Inc. as a �atter of fo.,~�al i t y . 705

DECISION - C.T.A. No. 4879 )( )( )( )( Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one from the other. There is however, in this instant case, a peculiar sequence of the organization and activities of L i dde 11 Motors, Inc. As opined in the case of Gregory vs. Helvering, "the legal right of a tax payer to decrease the amount of what otherwise would be his taxes, or altogether avoid thea, by aeans which the law peraits, cannot be doubted". But as held in another case, "where a corporation is a duaay, is unreal or a shaa and serves no business purpose .and is intended only as a blind, the corporate for� may be ignored for the law cannot countenance a fora that is bald and a aischievous fiction". "x M M a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in proper cases, aay disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take benefits of the transactions as the person accordingly taxable. "M M M to allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the saae is to sanction a circumvention of our tax laws." (and cases cited therein.) We are therefore inclined to believe that the saae jurisprudence is applicable in the case at bar. This observation is corroborated by the fact that "Lido 706

DECISION - C.T.A. No. 4879 - 11 - E>eport, Inc. is a �ajor e>eporter virtually 97~ of its =b""'u>.::s._l=-�n:...:..::e_.s,_,s~_...,w'""a,_,s,.__..._e..>..e...,p:t..:!o:<.:r'-"'t_,e'-"d.__--"'t_,o'--'W'-.!..:....=C:.=;._--:.I.:IIIu:P:t..:!O:<.:l',_'""'t..:!!s � � � " ( T. S. N. June 28, 1993 Hearing, p. 28>. Such being the case, We cannot accept as viable the Thesis of the Petitioner that "Lido E>eport, Inc. did not stand to derive any econo�ic benefit from the said non-competition agree�ents, which is why the agreement was s1..1bsequent 1 y rescinded and the responsibilities were entirely to be paid by W.C. I�port which stood to gain full benefit fro� non-co�petition agree11ents ��� " <T.S.N. p. 28> Q. Why do you say that it was W.C. Imports that stood to solely benefit and in fact benefitted from this non-co�petition agreements? A. Each of the spouses Cro�wells resided in the State of California in the United States and stood to offer no threats to us fro� an economic benefit to the perfor�ance of Lido E>eport, Inc. not~ fot~ that �attet~ the performance of Metonic Invest111ents. W.C. Imports as a 11arketing sales design organization within the United States clearly stood to benefit fro� non-co�petition agree�ents due to goodwill that was built which Cro�wells acquired to their sale of W.C. Illpot~ts to the Ashling Corp. <ibid., p. 30-31>. This is difficult to believe. For sure, Lido E>eport, Inc. had benefitted fro� the non-co�petition agree�ents since it was the sole �anufacturet~ of the goods which W.C. Imports sold and of which the latter was the only entity which 111arketed the products of the for111er. In 707

DECISION - C.T.A. No. 4879 - 12 - fact, 97~ of the goods which the Petitioner aanufactured are sold exclusivelY by W.C. Iaports. Cet"ta in ly, it would stand benefitted. And, furtheraore, as if to seal the fact that Petitioner is one and the saae with W.C. laports for taM purposes, the alleged Sanwa Bank standby Letter of Credit which allegedly proved "that spouses Croawell were paid the consideration under the Non-competition Agreements not by petitioner bf.tt by W. C. lapot~t s, Inc. who opened the standby. LC in favor of the Croawells" <Petitioner's Offer of Evidence, CTA Records, p. 185> was in the name of "CLARK & TREVITHICK TRUST ACCOUNT/METONIC 800 WILSHIRE BLVD. - 13th FLOOR, LOS ANGELES, CALIFORNIA 9001~," as Applicant, with the following inscriptions on its face: 1. A statement signed by ROBERT H. CROMWELL and/or VIRGINIA J. CROMWELL certifying that the aaount shown on the Draft represents a sua due and payable to ROBERT H. CROMW�LL and/or VIRGINIA J. CROMWELL under either of the following agreeaents: <1> Non-coapetition Agreement, dated Apri 1 14, 1987, by and among ROBERT H. CROMWELL, LIDO EXPORT. INC. and METONIC INVESTMENTS LIMITED 2> Non-coapetition Agreeaent, dated April 14,1987, by and among YIRGINIA J. CROMWELL, LIDO EXPORT, INC. and METONIC INVESTMENTS, LIMITED. 708

DECISION - C.T.A. No. 4879 - 13 - 2. No drawing shall be dated prior to March 31 , 1988. - Partial Drawings Not Allowed. CEMhibit P; Underscoring supplied> Nothing on the docu�ent's face would giv~ us even a hint that it was really W.C. l�ports, Inc. which paid the Cromwells under the Sanwa Bank Standby Letter of Credit. , If it were, as Petitioner alleged, then logically, must be one and the same. Having clearly established that �the Petitioner and W. C. I �port s, Inc. are, for taM purposes, considered one and the same, then the argument of the Petitioner that the $250,000.00 "was merely accrued but was never in fact paid by Petitioner, hence, not subject to withholdinQ taM" no longer holds water and its discussion, immaterial. Such being the case, the doctrine laid down in the case of Mar Fishing Co�pany, Inc., (CTA Case No. 4287, Oct., 4, 1991> relied upon by Petitioner is inapplicable. In the above-cited case of the Petitioner, it was, of course, presupposed that the doctrine of separate corporate entity has not been pierced, contral"Y to the findings of this Court in the case at bar herein Petitioner being found to be one and the sa�e with W.C. llllptwts, lnc. Hence, the difference. 709

DECISION - C.T.A. No. 4879 - 14 - As to the allegation that the consideration for the covenant not to co11prtr is considered inco11r derived fro11 the United States and, as such, not subject to Philippine withholding taH since the payers are non-resident aliens" is, to say the least, a distorted conclusion. !5tablished is the fact that it was the Petitioner which paid the Cromwrlls as sourced fro� an inco11r within the Phi 1 ippine'j. Only a prejudiced 11ind of the Petitioner can rver think of such an argu11rnt twisted out of its true i11port. Hence, pursuant to Section 22 (b) of the Tax Code, We find the Petitioner liable to withhold the taH equal to 30~ of the income derived by nonresident aliens not engaged in trade or business within the Philippines. The above pertinent provision is hereby quoted, thus: Sec. Tax on nom�~esident alien individuals - (a) H H H (b) Nom~esident aliens not engaged in ft~ifde or business within the Philippinl>s. lb!rr shiJl be levied. collected and paid for ~ach taHjble Year uoon the entire incoMe received' :: fro� all so\n~ces within the Philippiij.i bv every nonresident alien individu�l not engaged in trade or business within tba~ Philippine5 a5 in\~rest, dividend5, rents, t t l aries, wages, pt~eli u�s, annui t i fl!..s compensa~jgn,remuneration, eMoluMents, or other fiHrd o~ deter11inable annual or per~edical or casua 1 gains, pr�of its, incoMe, .. anCJ capital gaini (rHcrpt capital gains realized fro� 710

DECISION - C.T.A. No. 4879 - 15 buying and/or selling shares of stock of Philippine corporations listed in the dollal~ or any acceptable Foreign Currency Board of any s t o c k e >e change ) , =a...__,t~a=>e'--"e...,g,._l=l.::a:.:l,___t.::;..:o...__,3=-0.:::.";......l..o..f:;....__,s~"=-'c::..:..h. income: Provided, That capital gains realized from sales of shares of stocks in any do�estic corporation and real property shall be subjected to the ta>e pre~cribed under subsections Cd> and Ce> of Section 21. As to the other issue on whether or not Petitioner is liable to pay deficiency final withholding ta>e on dividend pay�ent, We find again for the Respondent. Petitioner's allegation that �the interests were paid by petitioner on a valid and genuine indebtedness incurred in pursuit of petitioner's trade or business� <Petition for Review, p. 7> �iserablv failed to convincr this Court. Petitioner presented the alleged pro�issory notes supposedly covering the amount involved, yet, the a�ount s do not tally with the financial state�ent submitted by the co�pany. The first pro�issory note amounted to P35l,OOO.OO (E>eh. J> and the other one a�ounted to P322,500.00 CE>eh. K> but the a�ount involved in the financial state�ent is only P&57,&08. There is indeed a discrepancy of al�ost Pl&,ooo.oo which by no �eans is a ma~hematical error. This leads Us to believe that the amourit of P&57,&08 is therefore, not an indebtedness b~t a cash dividend pay�ent subject to a final withholding ta>e. 711

DECISION - C.T.A. No. 4879 - 16 - WHEREFORE, in all the foregoing, the Petition for Review is hereby DENIED and Petitioner is ordered to pay the amount of P3,007,G33.82 as deficiency final withholding tax on non-resident stockholders and the su� of P2,912.19 as deficiency final withholding tax on cash dividends, plus 25. surcharge and zo� annual interest fro111 May 11, 1990 up to the full pay111ent SO ORDERED. ~RlA~MO'NO.~DE-ll~~I~ Associate Jud;" WE CONCUR: f ~uz,~ t ERNESTO D. ACOSTA Judge GRUBA J\.tdge CERT:IF:ICAT:ION I hereby certify that the this decision was reached after due consultation a111ong the 111e111bers of the Court of Tax Appeals in accordance with Section 13 At"t icl e VJ J J of the constitution. ~\Qt~ ERNESTO D. ACOSTA Pt"esiding Judge 712